global communications gaap summit 2013 - pwc · pdf fileglobal communications gaap summit june...

Global Communications GAAP Summit 2013

Sheraton Golf, Rome 17-18 June Workshop 1: The new revenue standard

PwC

Revenue, what’s going on?

Exposure

Draft issued

Effective

date?

Comment

period ended

Re-exposure

Comment

period ended

Jun 2010

Oct 2010

Mar 2012

2017?

Nov 2011

Q3 2013?

Final

Standard?

• Single comprehensive model applicable to all entities and industries

• Standard expected in Q3, 2013

Methods of transition :

− Retrospective restatement

− Simplified transition method (similar to cumulative catch up approach)

Slide 2

June 2013 Global Communications GAAP Summit

PwC

Revenue Recognition – The Five Step Approach

Step 1: Identify the contract(s) with the customer

Step 2: Identify the separate performance obligations

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognise revenue when, or as, a performance obligation is satisfied

Slide 3


PwC

What to expect in the standard?

November 2011 Exposure Draft

• Distinct devices (e.g. mobile phone) are a separate performance obligation

• Collectability is not a recognition criterion

• Bad debt is a reduction to revenue

• Stand-alone selling price (SSP) must be estimated if a market for the item does not exist

• Contract modification can result in a cumulative catch-up

• Costs to acquire customer contracts to be capitalised

• Revenue should be discounted if the contract includes a significant financing element

Still relevant?

7

Slide 4


PwC

Question time

Have you considered the impact on your business of the proposed revenue standard? 1) Yes - assessing the specific accounting and systems impact 2) Yes - implementing process and system changes 3) No - waiting to see what others do 4) Not sure

Slide 5


PwC

Meet FAT Further-Afield Telecom

FAT is a rapidly expanding global communications company providing fixed and mobile services to consumer, enterprise and wholesale customers.

FAT currently offers the following bundles of products and services to its customers:

• Mobile handset with a service contract;

• Set-top box with a TV subscription; and

• Special discounts to existing customers.

FAT also provides dedicated CPE as part of its networked IT contracts to global enterprise customers.

Mr Networker (CFO) is keen to understand the impact of the proposed revenue standard on the numbers......

Slide 6


PwC

Question time: handset and service

• FATconnect (FC), FAT’s mobile business, offers a mobile handset for an up-front charge of €100 and a 2 year service tariff with a monthly fee €50 (total cash consideration of €1,300).

• The mobile phone could be sold separately (not subsidized or bundled) for €300.

How much revenue should FAT recognise for the handset? 1) €nil – FAT is not in the business of selling handsets 2) €100 – the amount paid by the customer 3) €260 – the relative portion of the overall contract value 4) €300 – the stand-alone selling price 5) I am not sure

Slide 7


PwC

Solution: handset and service

Separate performance obligation

(1) Cash paid

€

(2) Stand-alone selling

price of performance

obligation €

(3) Relative

value %

(4) Relative

stand-alone selling price

€

EUR, except for (3)

Mobile phone 100 300 20 260

Service contract (24 x €50)

1,200 1,200 80 1,040

Total 1,300 1,500 100 1,300

Revenue recognition:

• Handset revenue (non-recurring) of €260 (instead of €100)

• ARPU of €43.33/month (1,040/24) (instead of €50) from service

Slide 8


PwC

Question time: Stand-alone selling price

How would you determine the stand-alone selling price?

1) The price at which you sell the handset separately 2) The price at which the handset is sold separately by competitors in

your market 3) With reference to a similar product (adjusting for functionality) 4) Cost plus a reasonable profit margin 5) Other

Slide 9


PwC

Question time: Other services

• FATmedia, FAT’s broadcast and TV business, also provides the FATVIEW set-top box with its IPTV subscriptions.

• The FATVIEW is designed for FATmedia’s IPTV platform and is not capable of operating on other TV platforms.

Is the FATVIEW set-top box a performance obligation? 1) Yes 2) No 3) I am not sure

Slide 10


PwC

Question time: Family line

• FATline, FAT’s fixed line business, offers its consumer customers fixed line rental for €20 per month when customer signs up for 24 months

• Customers on this tariff have an option to purchase a secondary family line for a monthly line rental of €1.

• About 80% of FATline’s customers take up this offer

Is the family line a performance obligation? 1) Yes 2) No 3) I am not sure

Slide 11


PwC

Question time: Family line

• FATline, FAT’s fixed line business, offers its consumer customers fixed line rental for €20 per month when customer signs up for 24 months

• Customers on this tariff have an option to purchase a secondary family line for a monthly line rental of €1.

• About 80% of FATline’s customers take up this offer

How should FAT recognise revenue on the family line? 1) Prospectively when the customer exercises the option 2) Calculate the relative SSP of the two lines 3) Calculate the relative SSP based on an assumption that 80% of

customers will exercise the option 4) I am not sure

Slide 12


PwC

Illustrative impact on FAT’s KPIs

€ Old Standard New Standard

Revenue: 11,000 11,000

services 10,000 7,000

equipment (non-recurring) 1,000 4,000

KPIs Old (€) New (€)

Service revenue (ARPU) 10,000

OFCF 2,500

EBITDA 3,000

ROCE (return on capital employed) 12 %

Slide 13


PwC

Practical implementation The portfolio approach

ED.6: This [draft] IFRS specifies the accounting for an individual contract with a customer. However, as a practical expedient, an entity may apply this [draft] IFRS to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the result of doing so would not differ materially from the result of applying this [draft] IFRS to the individual contracts (or performance obligations).

Slide 14


Deutsche Telekom will share their perspectives on the practical challenges of implementing the proposals in the next session.

PwC

Could the lease exposure draft impact revenue recognition?

• FATline enters into a 10 year contract to provide global managed services. Under the contract FATline must deploy CPE in over 1,000 client sites in 90 countries.

• The CPE typically has an economic life of 5 years. The customer has exclusive use of the CPE during that time.

• FATline must replace the equipment after the initial 5 years .

• FATline can choose which CPE is deployed and under the terms of the contract could change the equipment with the customers consent.

Has FATline sold or leased the CPE to its customer? 1) Sold 2) Leased 3) Does it matter

Slide 15


PwC

Which standard am I in?

Managed service (non-leasing component)

CPE (embedded lease)

Allocate consideration based on the relative SSP guidance in the Revenue ED

Revenue ED for service revenue recognition

Lease ED for lessor accounting on Type A lease

Lease ED says ...

Slide 16


PwC

Disclosure considerations

The exposure draft calls for a significant increase in the volume of disclosures related to revenue, including:

• Disaggregation of revenue

• Reconciliation of contract balances

• Remaining performance obligations

• Costs to obtain or fulfill contracts

• Other qualitative disclosures

• Interim period disclosures

Slide 17


PwC

Disclosure considerations Reconciliation of contract balances

Unbilled receivables Ref

Opening balance X

Additional services rendered a) X

Subsequent billing b) (X)

Amounts credited c) (X)

Closing balance X

a) Represents the value of services that have been provided to clients during the year but not yet billed. The revenue associated with these services has been recognised in line with FAT’s accounting policies.

b) Represents the amounts that have been billed during the year.

c) Represents unbilled receivables subsequently reversed.

Slide 18


PwC

Industry investment analyst views

Boards' Rationale Risks and Concerns

Better information for investors • Mismatch between revenue and cash flows

• Complexity and risk of error • Inconsistency between direct and

indirect sales channels • Distortion of key metrics

Accounting ‘sees through’ company and market specific differences

• Could encourage uneconomic behaviour

Removal of industry specific rules • No pricing interdependency between mobile phones and service plans

Slide 19


PwC

Question time: What do you think?

After the workshop today, in which area will the proposed revenue standard have the largest impact for you? 1) Systems and processes 2) Financial metrics 3) Marketing department 4) IT department 5) Sales tax 6) Other

Slide 20


Thank you

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120629-165105-BN-OS

global communications gaap summit 2013 - pwc · pdf fileglobal communications gaap summit june...

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